Mitie eyes flat profits as it sticks to long-term knitting
Outsourcing provider Mitie Group saw its shares drop on Wednesday after the company said it still expected first half operating profits to be “flat to slightly down”.
FTSE All-Share
4,424.23
16:15 26/04/24
FTSE Small Cap
6,475.93
16:15 26/04/24
Mitie Group
114.40p
16:14 26/04/24
Support Services
10,643.29
16:15 26/04/24
Mitie said a muted performance from its social housing unit had dented profits, while an unfavourable contract mix in cleaning and the write-off of billed mobilisation costs in care & custody also did damage.
Chief executive Phil Bentley said: "The majority of our businesses are performing well and our larger contracts are delivering solid growth in volumes and profitability. We are maintaining our full-year guidance as project work volume is increasing, our in-year sales wins are growing and like-for-like revenue growth has strengthened in the second quarter."
Mitie said in the trading update that first-half revenue is expected to be fairly flat, increasing by 2-3%, as the cleaning and care & custody divisions are expected to drive growth after contract wins.
The “significant” contract wins stemmed from local authority, banking, industrial, transport, NHS and retail clients.
However, the FTSE Smallcap-listed company’s overall order book has declined from the £670.1m at the end of March, despite the availability of contracts following the demise of major rival Carillion, as Mitie focussed on delivering long-term contracts.
"The environment in our industry remains highly competitive, especially when it comes to contract renewals. We see technology, especially in our core businesses, playing an increasingly important part in differentiating our service delivery and improving margins, and therefore we are continuing to invest in the 'Connected Workspace' to accelerate growth," Bentley said.
With cost efficiencies expected to benefit the second half, guidance for full year EBITA and costs and benefits from Bentley's 'Project Helix' were unchanged, with consensus pointing to £98-99m of EBITA for the full year.
Mitie’s shares were down 9.29% at 139.70p at 1215 BST.
RBC Capital Markets noted that, until Wednesday, the shares "have done very little of late and this remain one of the cheaper stocks in our coverage universe" on 10 times calendar 2019 earnings.
"Whilst its end markets remain challenging from a volume and pricing perspective, its cost saving initiatives should ensure that margins remain underpinned – we would note that we only forecast margins of 3.7% over our forecast horizon (compared to its medium-term aspirations of 4.5%-5.5%)," RBC analysts wrote. "Technology is clearly seen as a big differentiator (and a likely source of margin enhancement) and we also like the fact that management is improving the ‘credibility’ of the balance sheet. This will be a slow burn, but it is encouraging to see guidance held and with the rating not prohibitive for a turnaround we retain our positive stance."
Jefferies noted that billing cycle improvements have been delayed while some finance activities are offshored to India and consequently the balance sheet is not improving, with average net debt will be £40m higher than a year ago and FY19E net debt will be flat at circa £193m.